 Now we're going to talk about how a recession will affect planned spending and investment and the equilibrium income in the economy. So let's say the economy starts off in a boom, in a good situation, where we have planned spending equals consumption plus planned investment, and output is at Y0. And let's say this is a period of high employment, the economy is doing very well, and then all of a sudden, as happened in 2007, 2008, the economy runs into a big mess and demand declines, the financial system seizes up, and so aggregate demand or planned spending falls. How do we represent that on this graph? Well, what we show is that there is a shift, there's a shift down in the planned spending curve. Now spending goes down from A or Y0 all the way over to here, Y1. But that's when things get really bad, because that's when the multiplier process starts to kick in. So let's say because spending goes down, people get fired, they lose their jobs, their incomes go down. As their incomes go down, they consume less. They can buy fewer shirts, fewer cars, fewer houses, and all of a sudden that means that those people who are selling shirts and houses and cars, they don't get an income, so they get laid off, and their incomes go down. And so we have this downward spiral through the multiplier process, and the economy starts moving down. How far will it move down? Well, income will decline all the way down to the new equilibrium, where the planned spending curve meets the 45 degree line, where planned spending equals actual spending. So the economy will move down all the way here to Y prime, Y dash. And so the income expenditure model describes how changes in aggregate demand or desired spending in the economy through the multiplier process change the amount the economy actually produces. Now we could hopefully move in the opposite direction as well. Once the economy is down here, say at point B in a recession, if spending goes up, the economy will have through the multiplier process move in the opposite direction. And that's where we add something else to our national income account model, government spending.